One in three rehabilitated student loan borrowers are likely to face default within two years due to problems within the student loan programs, costing borrowers over $125 million in unnecessary interest charges, according to a new report from the Consumer Financial Protection Bureau’s (CFPB) Student Loan Ombudsman.
According to CFPB, more than 8 million student loan borrowers have gone at least 12 months without making a required monthly payment and are in default, including about 1.2 million who have defaulted in the past year. The new report examines debt collection and servicing problems within the two federal programs that are designed to assist defaulted borrowers and help them “rehabilitate” their loans and, if eligible, enter into an income-driven repayment plan.
However, CFPB has received complaints “about every step of the process,” including delays and dead ends in applying for income-driven repayment plans. The report estimates that over 200,000 struggling borrowers will redefault over the next two years, despite their eligibility for income-driven repayment. Furthermore, these borrowers will accrue over $125 million in unnecessary interest charges through lost interest subsidies they would have been able to access under an income-driven repayment plan.
The Ombudsman’s analysis also found problems with debt collection that result in delaying borrowers who are looking to get out of default. For example, CFPB received complaints that debt collectors have set incorrect monthly payment amounts, presented difficulties with verifying income levels, or have failed to apply previous monthly payments toward the loan rehabilitation process.
The economic incentives provided to debt collectors also do not encourage long-term success for struggling borrowers, according to the Ombudsman’s report, which shows that debt collectors are paid as much as $40 for every dollar collected, even if the borrower ends up redefaulting on the loan. Complaints made to CFPB show that “collectors may focus on short-term borrower outcomes … but fail to provide important information about how to stay on track over the long term,” according to CFPB.
Rehabilitated borrowers “report a payment shock” when they are billed by their servicer for “hundreds of dollars more per month” than what was arranged with a debt collector, indicating large communication gaps between borrowers, servicers, and debt collectors, according to the report. Borrowers also told CFPB that they received conflicting information about what they were expected to pay monthly, where to send the payments, what amount to pay, and how those payments would be applied to their balances.
In the report, the Ombudsman recommended that policymakers and other industry parties improve the recovery process for struggling student loan borrowers by streamlining and simplifying the pathway from default to repayment plans that are affordable for borrowers. It also suggests that immediate action be taken so vulnerable borrowers will not fall through the cracks, including improving customer communications, better aligning the economic incentives debt collectors and servicers receive so that borrowers’ long-term success is the focus, and improving access to servicing data on the performance of borrowers who have previously defaulted.
As part of CFPB’s effort to better serve struggling and defaulted borrowers, the Ombudsman on Monday sent student loan servicers a voluntary information request that seeks new information on the long-term performance of previously-defaulted borrowers.
View NASFAA’s Servicing Issues Task Force Report for our recommendations on improving loan servicing.
Publication Date: 10/18/2016